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Auto Dealers Should Revisit Pay Plans in Light of New Overtime Rule

On May 18, 2016 the Department of Labor issued new overtime rules in which an estimated 4.2 million currently exempt employees will become entitled to overtime pay. The rules become effective December 1, 2016.

Currently, employees are considered exempt from the overtime rules if their jobs could be defined as executive, administrative or professional and they earn at least $23,660 per year. Beginning December 1, exempt employees must still perform executive, administrative or professional duties, but their minimum annual salaries must be at least $47,476. Nondiscretionary bonuses and commissions may be included as salary to satisfy up to 10% of the minimum on a quarterly basis. Nondiscretionary bonuses are those based on a prescribed formula, such as a percent of a department’s net income. This means that at least 90% of the minimum threshold each quarter (or $10,682) must be in the form of base compensation.

Since 1966, salespersons, parts persons and technicians at auto dealers have been exempt from the overtime rules. (The U.S. Supreme Court recently determined that service advisors may also be exempt under the DOL provisions.) However, dealerships typically employ management personnel, such as parts and service managers that are paid a low base pay with a significant portion of their compensation coming from bonuses and commissions. If a manager’s base compensation is less than $10,682 per quarter, he or she must be classified as nonexempt for overtime purposes, regardless of that manager’s job duties.

In order to determine the amount of hourly pay an employee receives upon which to calculate the overtime rate, all bonuses and commissions must be included in the calculation. For example, if a manager’s base pay is $7,800 per quarter, it might seem that his or her hourly rate of pay is $7,800 / 520 hours = $15.00 per hour. But if that manager also earns $5,000 in bonuses and commissions during that quarter, the hourly rate is calculated as ($7,800 + $5,000) / 520 hours = $24.62 per hour. So even though the dealership can only add 10% of the quarterly threshold amount to the employee’s base compensation to determine overtime eligibility, the entire bonus/commission amount gets added to determine the hourly rate upon which to calculate the overtime pay. This could result in a significant outlay for overtime pay to managers.

Another avenue for dealers is the “commissioned employee” exemption. To qualify for this exemption, the employee’s regular rate of pay must exceed one and one half times the minimum wage for every hour worked in a workweek in which the employee works overtime, and more than half of the employee’s earnings in a given period must be made up of commissions. In addition, the employee must be employed at a retail or service establishment. A parts manager working at a remote parts warehouse, for example, would not qualify for this exemption.

Dealers should review their pay plans to determine if they should be modified. For managers who work a lot of overtime but have a low base compensation, determine if changes to base pay, incentive compensation and commissions are warranted. For managers who don't work a lot of overtime, you may want to leave their pay plans intact, even if it means those managers will become eligible for overtime pay.

There is sure to be more discussion on this subject. The National Auto Dealers Association plans to offer a webinar on September 28, 2016.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.